The financial services sector is facing a period of “slower economic growth” amid market uncertainty post Brexit , according to the latest EY ITEM Club outlook for financial services.

It forecasts the recent downgrade in the UK's growth prospects following the UK vote to leave the EU will lead to a 1.8 per cent contraction in lending to business in 2017, followed by a further one per cent contraction in 2018.

Mortgage lending is predicted to grow one per cent on average per year over the next three years compared to three per cent in 2014 and 2015.

The stock of business loans is also expected to fall to £376 billion by 2019, “a level last seen in 2005”, the report states.

The banking sector is predicted will “easily weather” a slowdown in demand as a result of “the sector’s strong capitalisation, with more than £600 billion of high quality liquid assets, and support from policymakers”.

Last week Royal Bank of Scotland Group was reported to be one of the poorest performing banks in the latest European stress tests, and was forecast its capital levels would fall by 7.5 per cent in adverse economic conditions – the third largest fall in capital of the the 51 banks tested within the UK and Eurozone.

The ITEM Club report predicts banking industry assets will decline to £5.9 trillion next year, with earnings in the insurance industry also forecast to drop to £8.9 billion, “the lowest level since 2012”.

The report states: “Although banks have committed to lend, the forecast for slower economic growth means that demand for credit will weaken, with business and consumers less eager to take on debt.

“Mortgage lending and consumer credit will grow, but at a slower pace than previously hoped.

“Business lending is predicted to shrink by 1.8 per cent next year, with the recovery in lending now revised back to 2019.

“Banks will also face a squeeze on net interest margins and depressed profits from lending due to prolonged lower interest rates.”

The Bank of England is widely expected to cut interest rates from already historic lows of 0.5 per cent as part of a package of measures to billions of new capital into the financial system in a bid to stave off recession.

Sue Dawe, head of EY’s Financial Services practice in Scotland, said: “We had hoped 2016 would be the year that total lending recovered to pre-crisis levels, but with the revised economic outlook this looks increasingly unlikely.

“Whilst banks are still willing to lend, there is a strong sense of ‘wait and see’ from business and consumers as they await details of what Brexit will look like in reality.

“The impact of this shouldn’t be blown out of proportion - mortgages and consumer credit are still forecast to grow, albeit slower than before, and business lending is going to shrink slightly - the industry is in a good place to see through this ‘holding pattern’ period.”

ITEM predicts assets under management will likely rise by 1.5 per cent per year from 2016-2019, compared to 7.7 per cent in 2015, due to “increased investor uncertainty and a deteriorating economic outlook”

Dawe added: “It is clear that the revised economic forecast will affect financial services players in different ways and each sector faces unique pressures.

“Undoubtedly, the landscape in which financial services firms are operating has altered - consumers and businesses are going to think twice before they borrow, and be careful about what they invest in.

“It also looks like low interest rates – which affect all sectors - are here to stay.

“But this economic environment isn’t that different from what the industry has been contending with over the past eight years of change and challenge.

“In fact, thanks to the rigour instilled in their businesses through the crisis, the financial services industry is probably amongst the sectors best placed to deal with this within the UK.”